Expats looking to buy property in the UK should take steps to avoid new,
higher tax rates

For many years it has been customary and sensible for non UK-domiciled persons to purchase UK property in the name of an offshore company. This allowed the buyer to avoid UK Inheritance Tax (IHT) which would otherwise be payable on the death of the owner at 40 per cent of the value of the property (after allowances). An additional benefit of buying this way was that resale of the property could be affected by transferring the shares of the company, leaving the title to the property unaltered. This allowed the buyer to avoid stamp duty (now called Stamp Duty Land Tax or SDLT), so made the purchase cheaper for the buyer, or allowed the seller to charge more, or a bit of both.

Another advantage of corporate ownership is confidentiality. Details of the owners of UK property appear on a public register. Many like to keep their affairs private so purchasing through an offshore company allows the identity of the “real owner” to be hidden.

In recent years the rate of SDLT has risen rapidly. In the most recent budget it went up to seven per cent of the purchase price of properties valued at over £2 million. Raising the rate was designed to allow the UK Government to collect more revenue, so not unexpectedly the increase was accompanied by legislation designed to prevent the tax being avoided.

From now on, a company which purchases residential property in the UK valued at over £2 million will have to pay SDLT at 15 per cent. The Government has also announced that as of April next year non-resident “non-natural persons” will pay capital gains tax (CGT) on the disposal of a property. Individuals will not pay the tax so this, on the face of it, is a further cost of corporate ownership which is not applied to individuals. (Non-natural persons, by the way, are companies, unit trusts, partnerships and anything other than a private individual: it is not a reference to test tube babies or anything...) Exceptions to the 15 per cent rate are to be made for property developers and corporate trustees. So far there is no detail on exactly what that means.

UK-domiciled persons also might want to purchase through a company so they can rearrange ownership easily and cheaply. There are many reasons why they might want to do this. For them corporate ownership initially achieves no IHT saving. IHT is payable on their worldwide estate and the shares of the company are worth exactly the same as the property. But, if they later obtain non-domiciled status they could transfer the shares to a trust and avoid IHT. If they remain domiciled they could transfer the shares to a Family Investment Company, or to a suitable pension structure and avoid the IHT that way. The SDLT and the confidentiality advantages are the same for everyone.

Prior to these changes CGT was not payable in the UK on the resale of a property by a non-resident individual or entity. This is unusual as most countries charge CGT whenever a property within their jurisdiction is sold, irrespective of who sells it and who buys it.

If you are a new purchaser of UK property of £2 million or over (or a property which is likely to be worth £2 million or over in the future) how should you proceed? If you purchase in your own name then IHT will bite, and it is substantial. Purchasing in the name of a company avoids the IHT being payable on the property as a company never dies, but costs 15 per cent in SDLT now and potentially means paying CGT in the future.

The Government is also considering introducing a “mansion tax” which would charge corporate owners of UK property an annual fee of between 0.3 per cent and 0.7 per cent per annum, depending on value. This tax may not materialise as the Government proposes to consult before introducing it. But if it is brought in, the CGT could be avoided by transferring the shares in the company rather than selling the property. On a £2 million property that would save the buyer seven per cent at the current rates of SDLT and give him the same confidentiality and resale advantages noted above.

However it would also lock him into paying CGT based upon the original price paid by the company for the property (not the price he is now paying) if he was later forced to resell the property itself. In effect the new buyer is purchasing a company already pregnant with CGT.

Setting up a trust with a corporate trustee and using that to purchase the property would seem to give exemption from all the newly introduced penalty taxes. In theory it prevents the property from being transferred by a share sale but in practice it may well be possible for each buyer to set up a separate trust company for each property and to sell that company to transfer the property, or even for the sale of the property to be made by simply changing the beneficiaries of the trust to the buyer's own nominated persons. This seems a little obvious, so it may be that exemption from the new taxes is only granted for licensed or professional trust companies who offer the same service through the same trust company to a large clientele.

Discretionary trusts will be subject to the 10-year annual charge at a rate of six per cent of the value of the UK property. A Qualifying Non-UK Pension Scheme (QNUPS) will certainly avoid the new taxes. Pensions are generally given favourable tax treatment so purchasing through a QNUPS will avoid the CGT on resale and IHT as QNUPS are specifically IHT exempt. QNUPS, being a pension, can be a little bit restrictive but are a very attractive option for both UK non-doms and doms.

For those who are already holding property in the name of offshore companies, the SDLT will not be a concern as it is only payable on purchase of the property. The CGT will bite on resale of the property but, again, could be avoided by selling the shares in the company or, possibly, by converting the company into a private trust company which henceforth holds that property as trustee.

It might be worth considering transferring the property out of the company to your own name now before the CGT is introduced in April next year. That would necessitate paying SDLT now but there are ways to considerably reduce the amount which would normally be payable on a £2 million-plus property. The rate of SDLT payable by the individual buyer is now seven per cent but it should be possible to reduce this to around two per cent. That might be attractive for younger buyers who are in good health and can gaze into the crystal ball and know they are going to be around for a long time, so need not to be concerned about the 40 per cent IHT. For more elderly buyers, the 40 per cent IHT is likely to be the biggest concern, so individual ownership is particularly unattractive. For them it seems as though ownership through a pension or another sort of trust will be the way to go.

The above changes to the UK property regime are seismic. Anyone about to purchase or holding UK property which is valued at £2 million or may become worth that in the future needs to carefully review their options.

Howard Bilton is an UK and Gibraltar barrister, professor at Thomas Jefferson School of Law, San Diego and chairman of The Sovereign Group.